The Short Sale Foundation System

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3 Preview Of What You Will Learn Sections: Introduction...5 Short Sale What is a Short Sale? Pros and Cons of a Short Sale Short Sale Qualifications The Nine-Step Short Sale Process...13 Step 1: Send authorization to lender Step 2: Follow up & request short sale package Step 3: Complete short sale package Step 4: Submit short sale package to lender Step 5: Follow up on receipt of package Step 6: Schedule BPO/Appraisal Step 7: Educate the evaluator Step 8: Negotiate with loss mitigator Step 9: Short sale acceptance Frequently Asked Questions...18 Key Terms...19 Wrap Up...21 You Will Be Able To: Have a basic understanding of the short sale process and how these types of deals can fit into your business. SSF-V

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5 Introduction Throughout your time as a real estate investor, you will undoubtedly come across dozens of properties that are in pre-foreclosure with little or no equity. These properties have homeowners who may have fallen behind on mortgage payments or may owe more than what the property is worth. When faced with this situation, a homeowner will typically feel like they have no other option than to just give up and hand the house back over to the bank. When you come across a seller in this type of scenario, you may be able to present a viable solution allowing them to avoid foreclosure and in return, you can make a deal. In situations like this, the lender may allow a short pay or what we know as a short sale. A short sale works if and only if the lender is willing to accept less than the full amount that is due on the loan thus creating the short in the sale. Short sales not only create an amazing opportunity for you as an investor, but they create win-win solutions for everyone involved. Lenders are happy because they are able to recover some of their funds by avoiding yet another foreclosure home on their books. The homeowner avoids foreclosure, and saves their credit; while you are left with a great deal in which you can sell for a profit, or hold as a rental if you decide to do so. It is very important for you to truly understand the concept of the short sale and the process that goes along with it. Even if you do not choose to use short sales as a part of your real estate investment strategy, you should still understand them enough to be able to adequately speak the appropriate language and potentially refer to a short sale specialist. This 1,000-foot overview is not intended to teach you how to negotiate short sales and get into all of the nitty-gritty of the process. We want you to first learn the ins and outs, as well as the timelines. This guide will give you the knowledge and foundation of the short sale process. Short sales are one of the biggest opportunities out there in residential real estate! 5

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7 Short Sale 101 As an investor in real estate, you have certainly come across the term short sale before. If you are new to the game, the concept of short sales can often be overcomplicated. The process may have left you scratching your head, somewhat leery about going near these types of deals. However, with short sales being so plentiful in the real estate industry, it can be argued that if you don t understand this game, you re not really in the game. What is a Short Sale? A short sale is simply a sale in which a mortgage holder agrees to accept less than what is owed on the existing mortgage. For example, let s say a homeowner owes $500,000 on their mortgage, but the value of the house is actually $400,000. This means that there is negative $100,000 in equity which can create an excellent short sale opportunity. While you may be wondering why in the world a lender would agree to accept less than what is owed, keep in mind that they are in the business of making money, not owning homes. If the lender has to take a home back and foreclose, it becomes a non-performing loan on their books. By accepting a short sale offer, the lender is able to avoid a lengthy and costly foreclosure process with a seller of a home that cannot cover the difference. For investors, the success of a short sale deal all comes down to the value that the lender gives the home. The market value may be $400,000, but what does the bank believe the value of the house is? If a bank is going to accept less than their full payoff amount, the value of the home will be a large component of their decision. Therefore, one of two things will happen: they will either hire an appraiser or get a broker s price opinion (BPO) to make their determination. Once the lender and buyer s acceptance price is settled upon, you as the buyer would proceed with the purchase of the home, similar to any other conventional purchase transaction. Helpful Tip! Some banks require the seller to list with a Realtor in order to conduct the short sale. 7

8 Short Sale 101 Here is how a typical short sale might look from the investor s perspective: Remember to check with the laws in your state to make sure an attorney isn t required to negotiate the seller s debt. In some states this could be considered practicing law. Pros and Cons of a Short Sale If you ask an experienced investor, chances are they ll have some kind of opinion about short sales. While some won t go near them, others build their business around them. The fact of the matter is, however, short sales can certainly benefit everyone. Let s take a look at the pros and cons for investors, sellers, and lenders. Investors Pros Investors can sometimes buy properties with large amounts of equity. Short sale deals for real estate investing are not hard to come by. Detailed information about the home is readily available. Since homeowners often still occupy short sales at the time of the contract, they can be in good condition. Cons There is no guarantee that all the hard work that you put in to this process will pay off. A bank can turn around and say no to the short sale and leave you high and dry. Short sales can be a very lengthy process. Short sales require a level of detail, patience and expertise that many are unable to commit. 8

9 Short Sale 101 Sellers Pros Cons The long and arduous foreclosure process is avoided. (The average legal cost to a homeowner going through a foreclosure is around $7,500, according to the U.S. Congress Joint Economic Committee.) Homeowners avoid a foreclosure on their credit report. Homeowners are able to get out from an underwater mortgage and reduce debt. Homeowners avoid being legally evicted in the public and are able to complete the process in a more private manner. Homeowners can typically purchase a new home sooner than they would have if they had gone through foreclosure. Often times, homeowners can avoid deficiency judgments for the shorted mortgage that would not be waived with a foreclosure. Some government incentives actually pay sellers to go through the short sale process rather than walking away from the home. If a borrower has other assets and isn t bankrupt, they may end up being responsible for paying taxes on the banks loss. Sellers must be able to provide the lender with solid documentation, such as their pay stubs and proof of hardship. A bank can sue for a deficiency judgment. This judgment will appear on a credit report and end up having a negative impact, just as a foreclosure would (This is negotiable). Although less than a foreclosure, there is still damage to a borrower s credit. The name short sale is deceiving because a short sale can in fact be a very long process. You often have to list your home and have showings just like a traditional real estate listing. Lenders Pros Lenders avoid legal filings, hearings, and associated documentation of a foreclosure. Lenders don t have to worry about selling or holding on to a foreclosed property. The lender will typically receive more money from a short sale than a foreclosure. Banks get rid of excess inventory and bad loans on their books. Cons Banks are still losing money on a short sale deal. The process of a short sale involves a fair amount of documentation and processing. 9

10 Short Sale 101 Short Sales Help the Market Too! In a depressed economy, the housing market becomes saturated with underpriced homes due to foreclosures. Finding buyers for these properties can often prove to be quite difficult. Property values drop in neighborhoods occupied by multiple foreclosed homes as well. Short sales can help to resuscitate a neighborhood by making it easier for buyers to purchase homes at affordable prices. A buyer will benefit from not having to endure the red tape and bank auctions associated with the purchase of a foreclosed home. Also, since short sales may be able to recoup a higher percentage of a home s value than a foreclosure could, they can help home prices stop from falling to abnormally low levels. Helpful Tip! Before starting the short sale process with a property, make sure to check your state for any laws or regulations regarding short sales. Many states have seasoning deed restrictions on a short sale that has sold. You may have to agree not to transfer title to a property for days, for example. Short Sale Qualifications Before you even jump into the short sale arena, there are first a few items you must consider: Does the Seller Qualify? The seller will have to submit a letter of hardship explaining why he or she cannot pay the difference due upon sale, including why they have stopped making monthly payments. Unemployment, divorce, medical emergencies and death are examples of acceptable hardships. Typically, a seller who is approved will have little or no assets, such as stocks or bonds, which they could possibly use to pay off the loan. Keep in mind that these are not hard and fast rules. Some short sales do not require the homeowner to be behind on payments or to be in significant financial trouble, but these do increase their chances of getting a short sale offer accepted. 10

11 Short Sale 101 Helpful Tip! When working with homeowners, it s important to let them know that you will do your best to get a short sale accepted; however, you are not able to guarantee any results. There is no way to force a lender to accept a short sale. Does the Property Qualify? Hard comparable sales must verify that the home is worth less than the unpaid balance due to the lender. Most often, the mortgage must also be in or near default status. If the house is on a nice cul-de-sac, great neighborhood, everything is perfect, there s a large change that your short sale offer won t get approved. It could be uphill battle which you may have to pass on. However, if the house is in distressed condition, in need of repairs and not insurable, then it is a great candidate for a short sale. Is There a Clear Title? If the seller has a dirty title report and you wait too late to pull it, you could be making a big mistake. You ll need a clear title. Make sure whatever liens or judgments on title are those you are willing and able to take care of if the bank won t pay them off during negotiations. Helpful Tip! Because many sellers are drawn into short sales without fully understanding their implications, you should seek assistance of someone more experienced in short sales. It is important that you work with individuals who have invested in short sales and who have a good knowledge of the market to provide you with factual and practical advice. 11

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13 The Nine-Step Short Sale Process When it comes time to actually perform the steps of a short sale, you will want to make sure that the whole process progresses smoothly. Due to the challenges of a short sale, many investors look to outsourcing as an option. There are companies out there who specialize in short sales for you, meaning you don t have to deal with the hassles and uncertainty that may come along with the typical short selling scenario. Some firms are no doubt better qualified than others to cut a money-saving deal with lenders. If you choose this route, it s a good idea to check that the negotiation vendor has at least a few attorneys on staff as well as some experienced short sales agents. If you choose to do short sales yourself, this chapter is intended to touch on the majority of details and outline the short sale process more clearly so that you, the short sale specialist, can sit down and feel comfortable actually complete a short sale from start to finish. There are nine major steps to the process, which can be broken down into those listed below: 13

14 The Nine-Step Short Sale Process Step #1 - Send Authorization To Lender Your first step will be to begin gathering the general documents necessary for the short sale. You will need to send a Third Party Authorization (so that you can speak on behalf of the home seller) to the foreclosing lender, and request a short sale package, payoff, and reinstatement figures. Make sure that your authorization form has the homeowner s name (signed and printed), address of the property, lender name, loan number, social security number, and that it is dated. Next, you will call in to customer service to explain that you are working with a client who is in default. Check with them to see whether or not you will need to get authorization on file with them (customer service), the loss mitigation department, or both. You will want to ask how long it will take to get authorization on file and make sure to collect all contact information for each department. Step #2 - Follow Up & Request Short Sale Package There will be various documents, including authorizations, which are frequently lost and may need to be resent. By constantly following up with the lender, you will make sure that if anything needs to be sent again, it can be done immediately so that no time is wasted. At this time, it is also good to ask some additional questions such as: Is there a strict foreclosure or foreclosure sale date set? Who is the investor behind the loan? What type of loan is this? (Ex: conventional, adjustable rate mortgage, balloon, etc.) This additional information gathered will factor into how you ll approach negotiations when that time comes. Once authorization is on file, you also need to make sure to order a short sale package if it hasn t already arrived. When doing short sales, lenders prefer to receive their own short sale packages, not a generic one. Step #3 - Complete Short Sale Package Next, you will need to collect all necessary documents required by the foreclosing lender. Make sure to stay on top of the homeowner or real estate agent, or whoever sent over the property originally, so that you ll get the needed documents as soon as possible. Helpful Tip! It s a good idea to collect documents from the homeowner BEFORE you initiate a short sale. This will ensure that your process goes smoothly and you can hand everything in on time. 14

15 The Nine-Step Short Sale Process Here is a look at the documents you ll need to include in most cases: Letter To The Lender - Overview Of Offer Comparable Sales Repair Cost Estimate Short Sale Hardship Letter Borrower s Financial Statement Proof of Borrowers Income (pay stubs) Short Sale Offer and Explanation Checking and Savings Account Statements Purchase and Sales Agreement HUD 1 Settlement Statement Power Of Attorney Proof Of Buyer Funds Letter (optional) For any documents that cannot be obtained from the homeowner (i.e. tax returns, bank statements, pay stubs, etc.) make sure to have the homeowner write a brief explanation of why they cannot provide them and have them sign and date them. Other documents, such as the hardship letter or financial worksheet, must be included. Make sure that the hardship letter addresses three things specifically: What occurred in their life to put the homeowner in default? When did it occur and/or how long they have been in their current situation? What they have done to try and correct the situation? After all the documents have been received from the homeowner, call again and ask for the number it should be faxed to. Make sure that the package is 100% complete. Step #4 - Submit Short Sale Package to Lender Keep in mind that if there are two mortgages on a given property, the timing as to when you fax the short sale package may need to be different. Some lenders will want to see a payoff (or short sale acceptance letter) from the first mortgage before they will make a decision of their own. When this is the case, the best approach to take is to fax the first package, wait until the BPO/appraisal is ordered by the first, and then submit the second package. If the second lender then asks for a payoff, or if the first has accepted the offer, tell them you ve received a verbal acceptance and are waiting on a written letter. This typically is good enough for the second lender to begin the short sale process themselves. With some lenders, a call may need to be put in to the loss mitigation department immediately prior to faxing the short sale package. The reason for this is due to the fact that some lenders will need to prepare the file for a short sale. Otherwise, the short sale package will be thrown out without having a representative even look at it. Helpful Tip! When you make the ca;; to confirm receipt of the package, you should also confirm a follow up date. Make sure to have the correct contact information for follow up as well. 15

16 The Nine-Step Short Sale Process Step #5 - Follow Up on Receipt of Package After the documents are sent, it will typically take around hours for the information to be scanned into the lender s systems. That is the best time to make your first follow-up call. Continue to follow up as necessary until the package is received and all the documents are present. Once the short sale package is received, ask how long it will take before it is assigned to a loss mitigator. Ask when you should follow up and whether or not you should call the same phone number as before, or a different number. This step in the process can potentially take some time, depending on the lender. The time between when a package is received and when it is assigned can take anywhere from a week to a month. Helpful Tip! Don t forget to take your deadlines seriously. Once you initiate the short sale, complete everything in the allotted timeframe. If deadlines are met, your deal won t get declined or closed out. Step #6 - Schedule BPO / Appraisal Once the lender has your short sale offer on file, you must request a Brokers Price Opinion (BPO) to validate your offer. The BPO is crucial to your short sale success; it is the single most influential component lenders consider when deciding the amount of discount they will accept. Depending on the specific lender, some of them may have what are known as setup representatives. They will be the ones potentially responsible for ordering the BPO/ appraisal and organizing the package for the mitigator. At this stage, you are likely to face an objection. If the offer is too low, the mitigator or setup representative may not even be willing to order a BPO. Assuming the mitigator/ setup representative has agreed to order a BPO/appraisal, ask them how long it will take to be contacted by an agent/appraiser, how long it will take for them to get the BPO/appraisal back, and how long it will take them to make a decision. Step #7 - Educate the Evaluator Now we ve reached one of the most important steps in the short sale process. If the BPO/appraisal comes back too high, the deal is likely dead. This is one of the few parts of a short sale in which one mistake can end a deal instantly without any way to fix it. The BPO agent or appraiser will be contacting you (always provide yourself as the contact for access to the property to get in to do their BPO or appraisal). Schedule ithe appointment with them and make sure to meet at the property on time. It is always helpful and you will have a better chance for success if you bring your current offer to the lender, comparables that justify your offer, or any other supporting documents that keep the value in the range you think it s worth. You want to educate them on the property. Once the BPO/appraisal is complete, you ll need to wait for it to get back to the mitigator and for them to evaluate the offer against the BPO/appraisal. Then your negotiations start. 16

17 The Nine-Step Short Sale Process Step #8 - Negotiate With Loss Mitigator Once the BPO/appraisal has been reviewed with the current offer and short sale documents, the mitigator will accept, decline, or counter the offer. If they accept, great! Then you can start preparing to close on the property. If they outright decline the offer, you will need to plead your case. Begin by addressing the facts. Are there major damages to the property? Are there solid comparables to support your offer? Has the market been on a decline? Is the property in a heavy crime area? Be prepared to buckle down and fight. You may have to resubmit the entire short sale package or just the assisting documents. Either way, it will require several calls, extra persuasion, and perhaps resubmitting a higher offer(s) to get the mitigator to take a second look. If the mitigator gives you a counter offer, then you know at the very least, they re willing to play ball. Make sure to state all of the information that you have to illustrate the lower value of the property. Also, as you re negotiating, remain aware of what your end buyer s offer is, so you know exactly how much room you have. Be Patient, Yet Persistent Short sales often move at a very slow pace and require your patience. Although exercising patience may be difficult, the typical short sale deal takes anywhere from days. Most of this time is spent sitting around waiting for banks to review and respond to your offer. A successful short sale investor must also be persistent. Once the short sale offer is submitted and BPO completed, the case is assigned to a loss mitigator at the bank. Most often, these negotiators are overwhelmed with cases and they rarely return calls. Therefore, you must repeatedly call for status updates and be prepared to leave numerous voic s. Step #9 - Short Sale Acceptance Once you gain acceptance on the short sale, you will then need to prepare for the closing. Some of the tasks involved are: giving all necessary documents to the title company/attorneys, setting the closing date, checking the final monies owed for property taxes and water/sewer use, and also the final amount owed for condo fees (if applicable). Now that you have an idea of what the process actually is, you can see why we suggest that while you are waiting for an approval on one deal, you begin packaging your next short sale offer for another property. There will be plenty of free time for more short sales while you wait for the approval of your first. You never want to stop feeding the machine. Your goal should be to have an abundance of approved short sale deals in your pipeline consistently every month. 17

18 Frequently Asked Questions If you are just getting started, or considering short sales as a means to acquire pre-foreclosures, you will likely have the following questions. Q: How do you find short sale homes? You can gather potential short-sale bargains by checking out websites such as RealtyTrac.com, ForeclosureRadar. com, Redfin.com and Auction.com to start. RealtyTrac tells if that short-sale property is in foreclosure by comparing the sale data to RealtyTrac s foreclosure data. As you are networking, make sure you are strategically networking. Realtor relationships can also help you to gain referrals that are short sales. Typically, Realtors prefer not to work with short sales. After some relationship building, most would gladly give them to you or at least welcome your offer. The Multiple Listing Service (MLS) has short sales property listings, which may or may not be labeled as such. Depending on where you live, you may see investors who advertise with bandit signs or in your local newspaper. Call the investors directly and ask them if they are experienced in doing short sales and if they would be interested in working with you. Another good place is your local real estate investors club meeting. Q: How long do short sales typically take? The length of time can vary. It will depend on a number of factors, including the specific lender. Some lenders can approve a short sale in as little as two weeks, while others can take over a year. Most often, you can figure a typical short sale to be completed within a three to six-month time period. Q. Can you wholesale a short sale deal? Although it is possible, wholesaling a short sale deal is not advised. In some areas, this is labeled as flopping and crosses the line of mortgage fraud. Additionally, you are not able to assign a short sale payoff letter, which makes it difficult to close. The bank will want to see the same entity listed on the settlement statement closing the deal, as the one on the contract. To prevent wholesaling short sales, the banks have issued many deed restrictions that only allow the transfer of the property after a period of days depending on the restriction. Q. What is the approval process for a short sale? Lenders agree to a short sale based on a percentage of what they believe to be the current as is value of the property. Typically, there are approval percentages that vary from lender to lender. They also change frequently. For example, a lender may have an approval percentage of 84% of the as is value. If you offer 50% of the as is value, the lender will ignore you. If your offer is at the 84% mark, they may immediately start the short sale process, order a BPO, and actually respond to your correspondence. Q. If I m not a Realtor, can I still refer out a listing and get a referral fee? You cannot collect a referral fee if you are not a licensed Realtor. Q. What happens to the seller s credit rating after a short sale? What typically happens is the loan will show up as paid on their credit report. However, there will be a notation that says something along the lines of settled for less than originally owed. 18

19 Key Terms Authorization Letter: A dated and signed letter from the seller to a lender authorizing the lender to discuss personal information with a real estate professional. Broker Price Opinion (BPO): The estimated value of property as determined by a real estate broker. Comparable Sales (comps): Similar home sale prices in the region used as a metric in the calculation of a home s appraised value. Deficiency Balance: The difference between what a foreclosed home sold for and the remaining mortgage balance. The mortgage company may require a seller to pay the amount of the deficiency balance. Equity: This is the difference between the home s market value and the outstanding balance of the mortgage loan (as well as any other liens on the property). Foreclosure: When a property may legally be sold and the proceeds of the sale applied to the mortgage debt. A foreclosure occurs when the loan becomes delinquent because payments have not been made or when the homeowner is in default for a reason other than the failure to make timely mortgage payments. Hardship Letter: A letter submitted to a lender indicating the reasons why the borrower can no longer afford to make mortgage payments and what unfortunate circumstances occurred causing them to be in this situation. Lien: A legal claim on a property whereby the property serves as collateral for a debt or other obligation owed by the property owner to a creditor, service provider, or other entity. Loss Mitigation: A process that helps borrowers avoid foreclosure and lenders minimize their losses on delinquent loans. Real Estate Owned (REO): A property owned by a lender after foreclosure. Short Sale: When lenders allow homeowners to sell their properties for less than the total amount that they owe on their mortgage. Right of First Refusal: The right of someone who is given an opportunity to either accept or reject an offer before anyone else. Under Water (upside down): When the mortgage loan balance is greater than the home s value. 19

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21 Wrap Up #8 NEGOTIATE WITH LOSS MITIGATOR The mitigator will accept, decline, or counter your offer. Remember to be patient, yet persistent with your negotiations #9 SHORT SALE ACCEPTANCE Once approval is met, prepare for closing. Never stop feeding the machine. You should have a consistent amount of approved short sale deals in the pipeline #1 SEND AUTHORIZATION TO LENDER Once you determine a great short sale opportunity, submit a third party authorization to lender so you can speak on behalf of the homeowner SHORT SALE PROCESS #2 FOLLOW UP & REQUEST SHORT SALE PACKAGE Documents are frequently lost and will need to be resent. Follow up with the lender to ensure they have your authorization on file, & request package #3 COMPLETE SHORT SALE PACKAGE Compile necessary documents required by foreclosing lender, including hardship letter and/or financial worksheet #7 EDUCATE THE EVALUATOR Once the BPO is scheduled, educate the BPO agent on the property. Bring your current offer, comparables & any other supporting documents that will validate your offer #6 REQUEST BPO/APPRAISAL In most cases, the mitigator or setup representative will order a BPO. This will need to be completed to validate your offer #5 FOLLOW UP ON RECEIPT OF PACKAGE Follow up as necessary until the package is received and all documents are present #4 SUBMIT SHORT SALE PACKAGE TO LENDER Call the loss mitigation department prior to sending the package over. That way, they can prepare for the file ahead of time. Also, make sure to confirm receipt of the package & confirm a date to follow up. 21

22 FortuneBuilders 960 Grand Avenue, San Diego, CA FortuneBuilders, Inc. All rights reserved. This information is for educational purposes. We don t believe in push-button profits we believe in proven business systems, education, drive and hard work. We are committed to teaching you how to reach your goals. In promoting our educational programs, we illustrate success stories. We want you to know, students are not compensated for their testimonials. However, many of our most successful students join our team as Coaches and Trainers. As stipulated by law, we cannot and do not guarantee results or offer legal advice. As with any business, your results will vary and will be based on your drive, effort, follow-through and other variables beyond our control. We believe in full transparency, and a high standard of integrity, that is why we encourage you to read our full earnings and income disclaimer by visiting